Thursday, July 19, 2012

19/7/2012: Minister Noonan's 'valuations' & NTMA's latest scheme

An interesting - and potentially revealing - contribution from Minister Noonan on the prospective ESM involvement in purchasing Irish banks assets held by the Government - see full link here (H/T to Owen Callan of Danske Markets).

Here are some interesting bits (from my pov - note, emphasis in quotes is mine):

"...if Europe's new rescue fund takes over the government's stakes in its banks, it would need to do so at prices significantly above their current low valuations."

So what should be the prices benchmark to be paid by ESM for Irish banks?

We know what Minister Noonan thinks what they should not be:
"We wouldn't think we were being assisted or treated fairly if we were only offered the terms we could get from a willing hedge fund who wanted to purchase the stake the Irish government has in the banks," Noonan told a news conference"

Ok, a willing hedge fund is mentioned as a benchmark floor. What willing hedge fund? 1) Have there been approaches that set out some valuation? 2) Have these approaches involved sufficient depth of discussion to show the actual price the fund was willing to pay, other than the low-ball first bid? 3) Have these approaches been systematic or random?

Now, suppose there has been a series of approaches and the hedge funds' willing price is €X million. Suppose Minister Noonan insists on ESM paying a minimum price of €Y million that is above €X million, which means there is a positive premium to be paid by ESM.

What principle should guide this premium valuation? "The valuation will be an issue for negotiation but before we could agree, they would need to be significantly in advance of those figures," Noonan added, referring to figures showing that investments by the country's National Pension Reserve Fund (NPRF) in its top two banks were now worth 8.1 billion euros."

Is Minister Noonan seriously suggesting ESM should pay Irish Government more than €8.1 billion? Since NPRF valuations of the banks stakes are make-believe stuff with absolutely no proven testability in the actual markets, will ESM be buying into a loss then? Ex ante?!

Another interesting comment in the article cited above is the following one:

"The NTMA also confirmed plans to diversify its sources of funding later this year with its first sovereign issuance of annuity bonds to Irish-based pension funds and inflation-linked bonds also aimed at domestic investors.

Corrigan said it was not inconceivable that it could raise 3 to 5 billion euros over the next 18 months from the two new instruments.

"International investors don't owe us a living, they don't have to buy our paper, and if the local investors don't have the confidence to invest in the market and aren't seen to have that confidence, it's going to be very difficult to get international investors back," he said."

Which, of course is all reasonably fine but for two matters:

  1. Domestic pension funds will be acting against normal practice and investing in low-rated (high risk) government securities within the very same economy in which they face future liabilities (reducing risk diversification). In other words, Irish insurance funds will have to be compelled to undertake such investment in violation of acceptable international standards. Have the Government now also taken over the pensions industry to add to their banking sector portfolio?
  2. If foreign investors 'won't owe Irish Government a living' why should domestic investors owe Irish Government anything? By treating two investors differently rhetorically, does Mr Corrigan explicitly differentiate treatment of domestic investors from foreign investors? It appears to be exactly so because the products he references are not going to be offered to foreign investors. Which begs the third question:
  3. Will NTMA create sub-category of seniority for Irish pension funds and 'domestic investors' to effectively load even more risk onto them compared to foreign investors? After all, he seems to suggest domestic investor owe him something that foreign investors don't?
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